Manhattan Real Estate: New York City Real Estate Tips

A Kiss is Just a Kiss ... An Ask is Just an Ask

2009-11-05T15:21:34Z

We talk about trends and we generalize in the process of empowering ourselves and our readers with information that’s relevant and real. At end of day, though, a sale occurs when one individual seller and one individual buyer have a meeting of the minds. This means, as is always the case when humans are involved, that markets are not efficient and they are subject to the whims and oscillations of human behavior. As behavior is not always rational or efficient (yes, this point can be argued by die-hard theorists), neither are the real estate markets. Why this quasi-pedestrian intro? Because it all seems to go out the door in the negotiations process and it all starts with the asking price. On the buy side: Though we often advise buyers to consider the “value” of the property as a stand-alone data point, this rarely happens. It’s oh so easy to anchor yourself to the asking price and work from there. Many buyers, encouraged by this buyer’s market, approach properties with a standard 10% or 15% haircut off the top no matter what the ask. This strategy (if we could call it that) neglects the simple fact that all asking prices are not created equal. Some are priced above, some at, and others below market (yes, it happens). Further, there is the “value” of the property and then there’s the minimum that the seller will actually sell it for … ergo, the difference between seller and buyer expectations that Noah has so eloquently been discussing. (The reason I keep placing “value” in quotation marks is because a property is only worth what a buyer is willing to pay for it, just like any other asset.) The bottom line for the buy side is to treat each property individually to yield the most fruitful negotiations. On the sell side: Considering the buyer mentality, what is a seller to do? It’s tough for sellers in this market, because every buyer wants to feel like they’re getting a deal. This is an important distinction: they don’t just want to get a good deal but they want to FEEL like they “won”. As such, sellers have three options:

1. They can price high to test the market and bring the price down later. The negotiation cushion is huge but traffic is very limited and the staleness clock is ticking after the first few weeks. 2. They can price at market and hope that people understand this. Traffic is good but there’s little wiggle room in the price to accommodate those 10-15% automatic discount expectations. 3. They can price below market and hope to god the property gets bid up to the true “value”. Traffic is tremendous, low-ball offers are still made but the smart money prices the property where it should be in the shortest timeframe.

The bottom line for the sell side is that intellectually the third option is the winner, but emotionally it takes quite a leap of faith to go there. Most sellers we’re seeing are just not ready to jump. They’re saying: “but what if someone bites at a higher price? I won’t know unless I try, plus I can stay in the market for a while longer.” For buyers, asking prices should be relatively meaningless; for sellers, it's everything. Whichever side of the equation you’re on, the buy side or sell side, we’d love to hear your perspective. Buyers: are you willing to get in a bidding war, as we’ve heard so much about? How are you deriving your offers and how would you react to a seller who will not budge on their asking price at all? Sellers: what is your reaction to option #3? What drove your decision on where to price and how is it working out?

Another Quick Check Into Manhattan Real Estate

2009-11-04T17:30:46Z

A: Just wanted to provide some recent thoughts on the marketplace as seen through this broker/blogger's eyes. The Real Deal reports that "buyer are back to more rational behaviors":

A year after the financial crisis, Manhattan real estate brokers report that the market is finally returning to normal. But they don't mean the lightning-fast sales and skyrocketing prices of the recent real estate boom. They're talking about a more moderate, predictable real estate market, the likes of which hasn't been seen in Manhattan for years. "The last three years have been very interesting," said Jill Bane, an associate at Leslie J. Garfield & Co. Before the market cratered as a result of the subprime crisis, "prices were very high and there always seemed to be several competing bids," she said. Now, however, "a sense of normalcy has returned to the market," said Bane. Bane represented a townhouse at 17 Bank Street, on the market for $10.5 million, that recently went into contract. "People are buying; they are just not as irrational as the prior two to three seasons." In the wake of the financial crisis, the last few quarters have been characterized by unpredictable swings in activity. The fall of 2008 saw the market at a virtual standstill; spring began to thaw, and summer -- normally one of the slowest seasons of the year -- brought an unusual frenzy of sales. By contrast, the level of activity this fall seems to be relatively normal, settling back into its predictable seasonal pattern. Brokers, upbeat as always, say prices are at or close to their lowest point.

My opinion on today's market is fairly simple. There was a surge in activity as prices fell far enough to peak buyers interest; this surge lasted about 4 months (May-Aug) or so and saw monthly contracts signed volume similar to peak levels in 2007. Over the last month or two volume declined a bit to more normal levels. Properties that are priced correctly for their price point, are trading. Inventory levels seem to be muddling in the mid 9,000s; although my new data source has it closer to the 10,300 level. My business the past few months has been on the stronger side. I still believe that we have 1 or 2 more quarters of positive reports ahead of us, as deals in the pipeline close. These reports will be compared to beaten down reports in the same period one year earlier and likely provide support for broker statements that the market has indeed bottomed and is on the path to recovery. My opinion on that topic is a bit different. Fundamentally, we still have a weak labor market and are yet to experience any of the unintended consequences from actions taken to stem the crisis we just went through. Higher rates is likely one unintended consequence. Higher taxes or change to the tax code is likely another unintended consequence. Restrictions/deferred stock on bonus pay and regulation on wall street are a few others. However, I do NOT see a jolt to the market like we had when Lehman failed. Rather, there are things that can play out that constrain our market from seeing longer term sustainable price appreciation. What made me significantly less bearish in June than I was in late 2007 is the simple fact that the adjustment has occurred in a fast & furious way. Lehman failed and boom, the market froze and the adjustment took place. That was healthy. So healthy in fact that about 8 months later we started to see sales volume typical of the peak year in 2007! The main reason was lower prices, continued low lending rates and higher confidence in the asset class as a reflation trade mentality sunk in to buyers of Manhattan property. As this trend continued and became clear sell side optimism started to outpace the improvement in bids - discussed in the 'It Takes Two to Tango' piece in early August. That is when sales volume started to slow again! It takes two to tango and brokers hate when buyers' bids stop improving yet sellers optimistic expectations keep on rising!! As a seller you get access to way more information then any one buyer does. Sellers know traffic levels and where interest is for their property; assuming they require real time reports from their hired agents. Sellers also know where the bids are coming in! After a while both the broker & seller should get an idea on where a deal is going to happen at - and sometimes a solid early bid will have been overlooked and regretfully dismissed! Its not a surprise that when brokers discuss the increase in activity over the course of 4-5 months that maybe, just maybe, sellers are going to get a bit too optimistic on a stronger future bid to come in. This is where I see the market today. A slight healthy improvement in our marketplace as Armageddon was priced out from deals signed during the fear trade months of Feb-April - buyers react one way, sellers react another and here we are. Since I am only one man and Manhattan properties vary so much, I can only estimate the improvement in bids lately; it would look something like this: IMPROVEMENT IN TRADES FROM EARLY 2009 (by price point) HIGH END ($5M+) - bids improved from down 25%-40% from peak to down 25%-32% from peak HIGH/MIDDLE ($2M - $5M) - bids improved from down 28%-33% from peak to down 23%-28% from peak MID END ($1M - $2M) - bids improved from down 20%-30% from peak to down 18%-23% from peak LOWER END (Under $1M) - bids improved from down 17%-25% from peak to down 13%-18% from peak Something along those lines and most of the action has been in the lower end. I can't deny the improvement in bids just like sellers shouldn't deny that there is a limit to this improvement. It's impossible for me to see the entire market and since the contract price is kept a secret until closing to protect the parties involved in the transaction, I have to estimate based on my experience in the field and talks with colleagues that I trust. Every property is different and those with special features such as park/river views, private outdoor space, wood burning fireplace, or an exquisite renovation will retain their value better than properties without them. Dark apartments with little or no view and properties that require an extensive gut renovation are still hard sells. This is the most real time update I can provide; sorry its not more specific but you can't get too specific in a market like this where products have so many varying features attached to them! I don't see much in the way of major changes unless the tradable markets have a surprise for us down the road! If you have any observations on where bids are coming in, feel free to share your stories!

Introducing Ana-Maria

2009-11-04T16:44:41Z

A: I am happy to introduce a new member of the UrbanDigs writing team. It is always difficult to find and add new writers, to expand the scope of content on this site, because I want to keep the quality of the content at a very high level. There needs to be a passion to 'get yourself out there', as this is a very time consuming hobby that takes a while to see the rewards that motivates one to continue blogging. I think I found a nice new addition here who has that very passion. Hopefully you guys will speak out and interact with the topics that Ana Maria discusses here on UrbanDigs. My plan is to add one or two more writers with the upcoming relaunch of the site sometime in the first quarter of 2010. For now, here are some details about Ana. Ana Maria is co-founder of A+M Real Estate Advisory Partners. Prior to her real estate career, she consulted to Fortune 100 C-level executive leadership teams on articulating, aligning on and executing their business and human capital strategies to enable sustainable change. Ana-Maria developed her change management skills as Vice President of Retirement Plan Investments at American Express, where she led the redesign, rebranding and subsequent launch of the company's retirement benefits program, responsible for $6bn in retirement assets. She also worked in the Global Investments Group of American Express Bank as Director of Investments, re-branding its global product platform and upgrading its sub-advisory relationships. She joined American Express from Bear Stearns' Private Bank, where she consulted to retail and institutional clients on wealth and asset management strategies. Earlier, she evaluated and managed private equity partnerships at Hamilton Lane Advisors for the firm's pension and endowment clients. Ana-Maria holds an MBA in Change Management from the Wharton School of Business, an MA in French Literature from Bryn Mawr College, and a BA in Comparative Literature from Haverford College. Along with her partner, Marie Espinal, Ana-Maria will be discussing topics related to:

Real-time observations in the field of Manhattan real estate

Changing buyer & seller psychology

Educational topics to empower both buyers & sellers

Relevant strategy topics that may enhance both buyers & sellers to make better decisions given changes in the marketplace

Good to have you Ana-Maria!

A Rising Tide or Just a Ripple?

2009-11-04T12:56:15Z

It’s always nice to experience so much of what we’ve talked about. A few weeks ago, Christine talked about a shift in the lower end of the market and seeing significant signs of pick-up in activity. Considering the relatively limited inventory of <$400k properties, it’s not surprising that first time home-buyers may be using this time to swoop into the market and take advantage of historically low interest rates. The question is: is the shift spreading upwards to higher price-points or is this just a last hurrah before the expected anemic holiday months arrive? Though far from arguing that this is representative of the market as a whole, here is one recent on-the-ground example to chew on: - The property: A $750k 1-bedroom in West Chelsea, on the market for a mere three weeks from listing to a signed contract. - Three open houses were held: 14, 2 and 6 visitors, respectively, with an overlay of 5-8 showings per week excluding open house traffic. - Five offers altogether (one direct, four co-brokes); interestingly, yet as expected, all offers were generated from the first week of showings and inquiries. Further, three of the five offers came from investors, with only two representing first time home buyers. - The kicker: the final price (upon closing) will have been less than 3% away from ask. And no, this particular property did not represent a distressed situation, nor is the buyer flush with cash. So here are a few take-aways: For do-it-yourself sellers: a vast majority of activity comes from customers engaging buyer’s brokers. In this case, 80% of the offers came from this sub-segment (lower than the 85%-90% we normally see). If you are listing the property yourself and not getting the traffic you’d like, visit the open houses of comparable properties in your area and gauge their activity. If they’re hopping and you’re not, consider at least welcoming buyers with representation (i.e. paying their broker’s fee). For that matter, consider open listing with 1-2 firms to get that additional exposure that could well make the difference. If that doesn’t yield material results after a couple of weeks, officially list your property to get on the brokerage radar screen. [This is what happened with a $1.5mm seller whom we were advising; the disparity between his open house traffic and that of broker-represented comparables he toured was so great that it served as the tipping point to finally list.] For all sellers: it’s worth repeating that the first two to three weeks of a property’s life on the market are the most critical (here’s an UrbanDigs oldie but goodie as a reminder). Don’t squander it: maximize open house success and test different times on both weekends and weekday evenings. Lastly, be flexible with when your apartment can be shown (i.e. last-minute and evening requests); in this market, every show counts. Your highest & best offer usually comes in those first 2-3 weeks! For buyers: it’s understandable that you want to test the price elasticity of the property you like by starting out low in negotiations. That said, try to determine the maximum price you’d be willing to pay on the property BEFORE fully engaging (though clearly after having done your due diligence). This will not only help you avoid getting sucked into the emotional trap of bidding the property up just to stay in the game, but will allow you to confidently present your last and final offer, knowing that it’s just that: your last and final (preferably with an expiration date). We’d love to hear from you. Do you see activity (and more importantly, conversions) oozing up into higher price-points or are examples such as the one above exceptions rather than the rule?

Roubini: Mother of All Carry Trades Faces Bust

2009-11-02T18:52:29Z

A: As discussed right here 3 days ago when talking out loud about the extreme positive carry trade that is on what may happen if that reverses!! Professor Roubini gets into details. Professor Nouriel Roubini discusses, "Mother of all carry trades faces an inevitable bust", in FT:

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March. People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets. The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day. But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Told ya he goes into details! The professor lists 4 main reasons WHY the carry trade will 'unravel': 1. The US $ cannot fall to zero 2. The fed cannot suppress volatility forever 3. Markets might force the fed's hand into tightening on better than expected data 4. A flight away from risk and into safety All would trigger a dollar rally and hurt those aboard the carry trade gravy train. I discussed #3 above a few weeks ago. Who knows what may force the fed hands... So how do we know if it might be happening? You'll know. The US dollar will make a fast and fierce move to the upside on practically no news feeding the unwind further. Then other markets can react. Similar to how new highs make usually make higher highs as shorts cover positions which further powers the upward momentum - the same trading pressures can occur on an unwind of a very crowded trade.

Stiglitz: US Paying For Not Nationalizing Banks

2009-11-02T13:20:57Z

A: Well, I would think part right. But the core of the argument is that banks have not been lending and taking enough risk in the US consumer. With such excess and buildup of debt over the past decade, Im not sure increased lending and risk is what you want for a US consumer that is in the process of repairing their balance sheet and struggling with a rising unemployment environment. Seems counter productive to me. Time is what we need. Debt restructuring is what we need. Reorganization is what we need. And over time the write downs must be taken and the balance sheet repaired. Over the course of the process, everybody cutbacks. Hence the deflationary pressures. Fighting the natural order of things will only artificially heal things and likely lead to another crisis down the road. In the end, we'll have to finish the repair. Bloomberg reports that "Stiglitz Says U.S. Is Paying for Failure to Nationalize Banks":

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters at an economic conference in Shanghai Oct 31. “They would be lending and the economy would be stronger.”

So in hindsight, was more lending the answer? Lending right now to a consumer that is facing the toughest labor market in decades and who is ridden with debt already? I'm not sure if its me or not, but it seems such a simple concept to grasp that you cant solve a debt problem by issuing more debt. When the consumer and small business is in bad shape, we will see them start to save, reorganize, and possibly file for bankruptcy protection to restructure existing debts. Well, that is exactly what is happening. Did you know the Personal Bankruptcy Filings are up 41% compared to Sept 2008? Calculated Risk shows us the steady surge in filings since 2006 (click chart for larger picture). Now we see CIT Group finally filing for bankruptcy. Its the right thing. As painful as it may be for small businesses across the country, its what needs to be done. The US Treasury never should have injected funds for CIT preferred equity and warrants to begin with; and they would have saved about $2.3Bln from the TARP pool. Now the "government investment is likely to be wiped out, said people familiar with the matter." In the end, the same outcome prevailed. Stiglitz continues:

“The big risk we face now is that banks are going to overcorrect and not take enough risk,” Geithner said. “We need them to take a chance again on the American economy. That’s going to be important to recovery.”

This has been a continuing risk for the past 18 months. Credit has been contracting as excess is in the process of being purged. This is one reason why the M1 Multiplier has plunged: Our fractional reserve system of multiplying money is not working the way it was designed to because of the flaws embedded in the system itself. Stiglitz then gets the chord right:

“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”

The bailout did not cure the entire problem and the banks still have toxic assets held. Yes bids for most assets, especially those tied to securitized mortgages, have been propped up with a massive liquidity driven rally, but just how real is that? And will an extreme positive carry trade reverse itself in a painful way down the road? The fed & govt successfully avoided a systemic banking event that could have led to a very painful global disruption. The failure of Lehman was the closest we got. But we still don't know at what cost this avoidance comes with. We will find out over the years. Banks simply need to take the write-downs, restructure the debts, reorganize the business models, and come out stronger at the end of the day. If that means bankruptcy or nationalization, so be it. Mike Mayo was back at it again Friday reporting on Citigroup facing another $10Bln writedown ahead on tax deferred assets. The risk of not doing this is a lost decade with subpar lending even when the US consumer sees a stabilizing or better yet, a growing labor market. Thats the thing, at some point the labor market will stabilize and start to grow again; but how strong will the foundation be and how healthy will the banks be at that time? Accounting gimmickry and 'extend & pretend' can only take you so far! In the end, it all will come out. Bary Ritholtz also chimed in:

"One of the major complaints I have had about the bailouts and faux regulatory reform has been that it spurned the proven solution — the Swedish model — and instead embraced the worst example on the planet: The Japanese model. The refusal to force insolvent banking entities into bankruptcy is a large part of the reason, but its not the only one."

Yes. But one thing the banks actually got right was to CUTBACK LENDING & TIGHTEN UNDERWRITING STANDARDS TO WHOM THEY LEND TO & ELIMINATE EXOTIC MORTGAGE PRODUCTS THAT WERE DESIGNED TO ENHANCE AFFORDABILITY AND CUT CORNERS IN UNDERWRITING! My main point is, it was prudent for banks to slow lending to a US consumer that was already heavily in debt with housing prices looking for a bottom, in a rising unemployment environment. Arguing for more lending in this type of environment would have kicked the can down the road for another day. A contraction in lending is, while not the American way, one of the healthier things the banks could do given the environment we are both in now, and just went through.

Fed Treasury Purchases Over / Carry Trade On

2009-10-30T15:14:27Z

A: The fed's debt monetization experiment was a two pronged monster: buying tons of agency debt + $300bln of treasury securities. So far the huge supply of treasury auctions is not affecting the market at all. In fact, bid to cover ratios for the most recent 5-yr auction was 2.63 compared to the average of 2.35 for the prior 4 auctions. With $123Bln in auctions this week so far, more than $370Bln in bids were submitted; big time oversubscribed. Now the fed is no longer buying treasury securities, but will continue to buy agency debt albeit at a slower pace heading into the first half of 2010. One aspect of the quantitative easing program is now done with, for now. In the meantime, a big time positive carry trade continues as the fed stands behind everything. Don't be surprised to see the fed revive the treasury purchase program in 2010 or later should the bond market have a disruption or future auctions don't go as well as they have been recently. Via Bloomberg, "Fed Ends Treasury Buys That Capped Rates, Stabilized Housing":

The Federal Reserve completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs. Yields on the benchmark 10-year note, which help determine rates on everything from mortgages to corporate bonds, never rose above 4 percent after the central bank began acquiring the debt. The purchases were the first of U.S. Treasuries by the central bank to keep borrowing costs low since the 1960s. The Fed joined its counterparts in the U.K. and Japan in extraordinary debt-buying programs, broadening efforts to unlock credit and end the worst recession since the 1930s after cutting the benchmark U.S. interest rate to a range of zero to 0.25 percent. “The Fed also happens to be exiting the Treasury market at a good time,” Goncalves added. “Other markets, such as equities, which performed well due to the expansion of the Fed’s balance sheet are retreating and that will provide a backstop for the Treasury market.” Fed purchases have helped buttress demand as the U.S. sells record amounts of debt to finance a budget deficit that exceeds $1 trillion for the first time. Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.

So, lets think this out. Right as equities extend their rally into the 8th month now, their could be a nice setup to transfer gains out of stocks and into treasuries right when another $2Trln in supply is set to come on. Time will of course will tell. The credit crisis seems to be over. Almost every indicator there is that would show a distress in creditville if there were one, is looking good. Credit the fed's intense emergency programs, rate cuts and liquidity facilities for that. Armageddon certainly seems to be completely off the table. I wonder where the next hiccup might come from? It may not be from credit. We are entering what may be the next phase of this cycle and the markets could react next to the massive government spending/deficits that have taken place to stem the worst recession since the 30s. With the fed guaranteeing everything and engineering such a low interest rate environment (basically to recapitalize our banks), almost all assets got a strong bid; yes, the crappy ones too. AN EXTREMELY POSITIVE CARRY TRADE IS ON!! Stocks have been a proxy for everything. Remember I discussed how even with all the commercial real estate fears, the "CMBS AAAs, series 1, can't rally much more because the bids are close to par right now - around 93/94". There was a recent stumble in CMBS AAAs, Series 5 in the past week or so but I wonder how much of that was a result of the Stuy-town ruling against Tishman-Speyer. What happens when the fed is no longer there as a backstop? What happens to the carry trade? Things that make you go hmmmmmmmmmm. I'll get into this topic in more detail later. No good party lasts forever.

Once a puzzle, always a puzzle: Reading Housing Data

2009-10-30T13:40:37Z

We couldn't help but take note of today's article in the Real Deal that notes the downside of giving too much credence to national housing data. "With the glut of housing data and statistics available, it's difficult to know which figures give the most accurate representation of home sales and prices. In Manhattan, the disparity between national housing figures, such as average home price and sales, and city numbers can be particularly noticeable. Rather than one national market, there are, in reality, many mini-markets to evaluate, according to broker Douglas Heddings, president of the Manhattan-based Heddings Property Group at Charles Rutenberg Realty. Heddings told Fox Business News that it's unwise for both homebuyers and mortgage lenders to rely on monthly national data to determine housing trends. The data "can be incredibly confusing to the buying and selling public," Heddings said." Let's take a peek at the various aspects of reading data, and ways to avoid the pitfalls in trying to digest it. Seasonality: It's not news that real estate is highly seasonal. This means buyers buy in the spring and fall, renters lease in the summer and most activity is dead in peak winter months, each and every year for the most part. To adequately analyze housing data, you need to compare numbers to those of the same "season" last year. This is why month to month comparisons fail to see the big picture. Rather than waiting a whole year to compare data as it is generated, researchers "seasonally adjust" data to make it more useful and relevant, smoothing it out over the course of the year. Pay attention to the numbers quoted: seasonally adjusted data is reported as "SA", and not seasonally adjusted data is reported as "NSA". The trick is knowing which is which and how to read it. In a period of high seasonal volume, the adjusted numbers will be lower than the not adjusted, and vice versa, precisely due to this smoothing out process. Reading that SA housing starts are up by 20%, for example, doesn't mean that starts themselves are up by that much; rather that they beat the expectations of the smoothed out numbers we would have seen had we ignored seasonal influences. Understsand the nature of the numbers you are reading, SA or NSA, and read analyses through those respective lens. Margin of error: New home sales data comes out monthly, only to be revised up or down a some time later (same goes for unemployment figures, jobless claims, home prices, etc.). Needless to say, when the margin of error % is greater than the actual reported change in sales, the released figure becomes meaningless. Since the markets are forward looking, few people actually look back to see the revised numbers, relying purely on the first-reported estimates. Compare the margin of error with the degree of change being reported to gauge how meaningful the data really is, and don't neglect revisions. Trend numbers are so last year: Trend numbers imply a linearity of sorts. One could look at prices in February versus May, for example, draw a straight line and conclude the degree of movement (falsely assuming the data reflects the same 1-bed that sold for in February for $600k is now selling for $550k). What such trends neglect is the actual shift in inventory from month to month or quarter to quarter. The key question is: Is there a seasonal difference in actual market inventory, what does it look like and how significant is it? Observe the changing inventory of what you are comparing as a backdrop against which to analyze the data. Beware of sequential reporting: Take month-on-month and quarter-on-quarter data analysis with a grain of salt, as it neglects the very seasonality we've been discussing. Of course Q2 will be busier than Q1, for example; this happens every year. This is why researchers primarily use seasonally adjusted numbers versus not seasonally adjusted data. Year on year comparisons (y-o-y) provide a more accurate perspective on market activity. Do not make decisions or enter negotiations relying solely on quarter-on-quarter data. Year on year imperfections: While Y-o-Y data is the gold standard, even it is imperfect. Great examples can be found on the Lower East Side and Midtown East, where a plethora of new condo developments have significantly skewed year-on-year sales numbers upwards based on luxury inventory which previously did not exist. Neighborhoods have evolved significantly over the last few years and will continue to change over time. Analyze year on year data with an understanding of neighborhood-specific developments. To tidy up all of these points and wrap'em with a ribbon, not so long ago, we came across a WSJ article mentioning that NYC housing prices were flat, only to add in a small caption that the NY data did not include co-ops and condos. Reader beware. Don't take headlines at face value, particularly national headlines. While there are nation-wide, macro dynamics at work, real estate has and always will be a local game, with all the pros and cons that come with that. So, while Noah and company at UrbanDigs will still provide real time analysis on changing trends in the Manhattan residential marketplace ("Expect Significant Quarter-to-Quarter Improvements"), their will always be a caution tag attached.

Discounted Sublease Rates Pressuring Landlords

2009-10-28T15:00:54Z

A: This is part of the deflationary pressures that I discuss here often, all part of the healing process. Its painful, but it's healthy and corrective. Half off sales, foreclosure sales, Bulk REO deals all lead to new owners with a more efficient operating environment with less debt overhang with which to manage the properties. This allows the investor/purchaser to offer lower rates to consumers; assuming an income producing property of course. This in turn pressures existing inventory. The deflationary cycle is a cycle like any other, feeding on itself until the excess is purged. Add in the sublease element and the companies that are tied in to longer term leases but are no longer using the space, and you get one more pressure. The chart below for 2009 Manhattan Office Market Vacancies is from OptimalSpaces.com. The NY Times reports, "Bargains Abound in New York’s Sublease Market":

Financial companies are trying to sublet space that they are no longer using in some of the most desirable office buildings in Midtown Manhattan, and the rents they are asking are heavily discounted compared with what landlords are seeking for similar space across the street — or even in the same buildings. Many large financial companies dumped hundreds of thousands of square feet on the sublet market, with much of that space in prime Midtown locales near Grand Central Terminal, Rockefeller Center and the Plaza Hotel. Now, the sublet space that is still on the market is being offered at rents much lower than rents for space that can be leased directly from landlords in the same submarkets. “This is going to have an impact on the rest of the market” for office space in New York, said Joseph Harbert, the chief operating officer of the New York metropolitan region for Cushman & Wakefield, a provider of commercial real estate services. “If I am a tenant, and I can get sublet space on Park Avenue at a discount, why would I go elsewhere and pay more?” He said that the gap between the asking rents for direct space and sublet space in the most desirable Midtown office buildings — what brokers generally refer to as Class A space — was the largest he could remember. On average, the owners of Class A buildings in Midtown Manhattan are now asking $72.03 a square foot, compared with $55.68 for comparable sublet space, according to Cushman & Wakefield. So tenants willing to sublet can get a 22.7 percent discount in Midtown. The discount was 12.6 percent a year ago.

A 22.7% discount between sublease space and Class A space from landlords? Ouch. That is a bargain worth discussing and one that should spark the attention of would be tenants. Now, the only concern is whether the current distress in the sublease market is a true indicator of the actual marketplace for Class A space. While sublease rates are a good measure as to where the real market is, we do not know the terms of the sublease or the desperation of the corporation that is seeking to re-rent out their space; perhaps at a loss. Enter Robert Knakal, Chairman & Founding Partner of Massey Knakal, who writes on NYC's investment markets in his StreetWise blog:

"Sublease space is very indicative of what the real market is, because the sub lessor is willing to get whatever the market will currently bear. They do not have artificial constraints on what the lender is requiring or what the debt service payments require rent levels to be. The key area is the term of the sublease. In order for the sublet rent to have integrity as an indicator though, the sublease term has to be substantial enough to be a truer indicator of the market. A minimum of five years and ideally as close to ten years as possible would help gain credibility as a true indicator of the market. Clearly short term sublets for 3 years or less are not indicative of what market rents are."

Mr. Knakal makes a very solid point. What are the terms of the subleases that are being signed at a 23% discount to comparable Class A office space in the same area? If its very short term, it loses some luster as a true indicator of where the office market seems to be. So lets just use a bit of caution and try to dig up more details about the sublease market before coming to any concrete conclusions on how off the Class A market may be from its ultimate bottom and if it really is following the sublease path. One thing is certain, the phenomenon is a deflationary one.

Co-ops Should Ease Up A Bit & Shore Up Balance Sheets

2009-10-27T15:59:34Z

A: Before you mis-interpret the headline, please read on. Did you ever wonder what percentage of buildings out there may be financially mismanaged? I am of the belief that when things get euphoric, regulation of some kind should tighten to constrain risk taking and speculation. On the flip side, when things get too slow or facing a fierce downturn regulation of some kind could loosen a bit and encourage a more stable marketplace. All within limits and never incentivizing too much risk taking or buying something you can't afford. This is not the kind of market that co-ops should be tightening up in; yet today I am both hearing and seeing more talk of board turndowns without a reason provided. Lets assume for a moment that the main purpose of a co-op board is to efficiently and properly manage their building and to maximize value for the shareholders of the corporation. Lets also assume that the value of the shares owned in this corporation goes into a multi-year recession; and are worth less than it was at peak, trending lower, and seeking stabilization. Sounds like what we just went through. What is a co-op board to do? Well, one quick way is to use your powers to loosen up policy a bit without sacrificing future shareholder value? In a phrase, expand the target audience that is both willing & able to buy into your corporation! Its funny, without naming building addresses I can tell you that I just experienced my 2nd board turndown in a co-op that was low on cash in reserves and set to make a huge chunk of change via a flip tax from an original shareholder from the 70s. I can also tell you the buyers were more than qualified to purchase this unit and secured a loan commitment. No reason provided. Make much sense? Not at all. I know that the building reserve fund would have surged 55% if they approved the deal. Yet it was not to be. Now future buyers in the building may adjust their bids or walk away after discovering a large building with such low reserves - how is that for maximizing shareholder value. Some reasons I am hearing for recent board rejections include: a) price being too low b) buyers debt/income ratio being over 25% c) aggressive accounting on tax returns shows a much lower Adjusted Gross Income d) inconsistencies in the board package & financial statements provided e) lack of liquid assets after closing f) uncertain employment situation g) inter-building conflicts Co-op boards will always be protective of their shareholders and their building; as they should be. But often in crazy times the line gets crossed and decisions come down that makes even the most experienced brokers or managing agents scratch their heads. Co-ops that have a history of being tight & nitpicky should consider loosening up a bit; especially if the building just finished multiple assessments for major capital improvements and is facing a depleted reserve fund. You see, I find that many buyer's generally want it all and who can blame them. They want low monthly expenses, but they want every amenity possible. They want the building to operate at a profit, but they don't want any flip tax. They want recent capital improvements but no assessments. You can't have it both ways and in the end every building must be managed properly to handle the work that needs to be done down the road. Every building will have leaks, need a roof repair, need a boiler, need a replacement of elevator relay switches, local law 10/11 facade inspection and pointing, and have to upgrade their hallways, elevators, lobby, etc.. at some point in time. No building is exempt from the effects of time so they should financially prepare for it today - call it the building's retirement account. Start basic. This is the time where co-ops can loosen up a bit on house rules within reason. If the building has a high owner/occupancy rate because of a very strict subletting policy, perhaps the time has come to loosen that rule a bit and widen the target audience interested in your products. Add a fee for the owner or other revenue generator that goes directly to the building reserve fund for a 2 & 2 subletting policy - keeping in mind that you can't let the owner/occ rate decline to a level that adversely affects the entire corporation. If the building does not allow pied-a-terres, maybe now is the time to overturn that rule and reach out to a slightly wider audience? Other areas to loosen include allowing guarantors, co-purchaser's, or parents buying for their children; all within reason and board pre-determined guidelines. Maybe the building has a loan tied to a very high interest rate? Perhaps a simple refinance at a lower rate and take out a bit more equity to the point where the interest payments are still the same, or only slightly lower - then deposit that extra money into reserves for future capital improvements limiting the need for more aggressive assessments? Buyers love reserve funds! Minimizing red flags may maximize transaction volume; especially for building's that utilize a flip tax as a revenue generator, Shore up your balance sheet, add more revenue generating services to your business, expand your target audience, and increase demand to your product. Increased shareholder value + increased confidence in the product being purchased = stock goes up. At least in theory. Building's whose reliance for revenue is on flip tax only may see problems if the market goes into another freeze or sales volume dries up because of a lack of transactions in the building. Co-ops should try to spread out their revenue streams rather than rely only one main source! The goal is to minimize consistent rises in monthly maintenance that will constrain affordability for future sellers in the open market. You can't change the market or the markets way of valuing your product due to general confidence, macro factors, and affordability. But you can enhance demand and increase the size of the buyer pool that views your building/unit as 'meeting their needs'! And that can go far in cushioning this downturn. Call it 'maximizing shareholder value'. Where you don't ease up is financial qualifications for prospective purchasers. However, you can certainly loosen up on the "% DOWN" requirement if your building has enacted more stringent policy over the course of the past boom. I mean, do you really need to require 40%+ down right now to protect shareholder's interest against the likelihood of default? No, you don't. Rather that policy was intended to target a different end result; targeting a certain kind of buyer to 'join the club'. Lower it and ask the buyer to put 12 months of maintenance in escrow if they are borderline to meet pre-determined financial guidelines. If your building has a 40% or more requirement for down payments and you are noticing a big dry up in prospective buyers given the nature of this slowdown, what will happen if you lower that restriction to 35% or 30% down? Does this really put the co-op at serious risk in regards to a buyer that can't afford the property? The key is maintaining tight requirements for employment situation, salary, debt/income ratio and liquid assets leftover after closing. By tweaking the percent down rule slightly, I don't think you risk a whole lot but your rewards could be a wider buyer pool that can now afford to purchase a unit in the building & pass your board! Today, I find banks to be more lenient than co-op boards; even with the tightening of underwriting standards.

Court Rules Against Tishman Speyer in Stuy Town Case

2009-10-22T15:07:07Z

A: Breaking news. This is going to be a thorn in the side of the Stuy Town owners who bought the complex in 2006 for $5.4Bln. The complex..."now has a market value of about $1.99 billion, meaning New York-based Tishman and BlackRock owe more to bondholders than the apartment complex is worth, according to Steve Kuritz, senior vice president at credit rating company Realpoint LLC." Ouch! Via Bloomberg's "Tishman’s Stuyvesant Town Rent Rise Voided by Court":

Tishman Speyer Properties LP, owner of Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, lost a tenants’ lawsuit in New York state’s highest court accusing the company of improperly raising rents. The New York Court of Appeals in Albany said today the increase in rents on about 4,350 apartments in the massive complex on Manhattan’s east side violated the law because it was built with city assistance and the building’s owners received tax breaks. The court noted today’s ruling wasn’t unanimous, adding “the dissent predicts that our decision will cause ‘years of litigation over many novel questions to deal with the fallout from today’s decision.’ Tishman and its partner BlackRock Realty LP bought the 80- acre, 11,200-unit developments for $5.4 billion in 2006 with plans to remodel and raise the cost of rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds. The property now has a market value of about $1.99 billion, meaning New York-based Tishman and BlackRock owe more to bondholders than the apartment complex is worth, according to Steve Kuritz, senior vice president at credit rating company Realpoint LLC. He said a default “is probably inevitable.” A default “could be the triggering event for the collapse of the commercial real estate market,” said Stuart Saft, a partner at law firm Dewey & LeBoeuf LLP in New York who specializes in real estate. “The losses the lenders are going to take on Stuy Town could force them to call some of their other loans on commercial property.” A $400 million reserve set up by Tishman and BlackRock to pay debt service will be depleted by December, according to RealPoint. About $24.4 million remained in the fund as of Oct. 19, Kuritz said, citing a report from the loan’s master servicer.

Crazy, but I really didn't think the hit was that large? I'm off to appointments most of the day and will have to sit down and digest this for a day or two before offering further ripple effect opinions from this court decision. It seems a bankruptcy filing is near to protect Tishman from creditors.

Fed Beige Book: Manhattan Apt Sales Remain 'Weak'

2009-10-21T19:45:26Z

A: Well, I'm in no position to argue the almighty fed and their Beige Book observations, but I certainly would not describe the recent pace of sales 'weak' by any means; especially considering the shock this market went through. It is what it is and sales activity has increased significantly during the months of May, June, July & August, while slowing a bit over the past 8 weeks or so. The reason for the rise in activity continued to be lower prices, low lending rates, increased confidence in the asset class, and a delayed seasonality effect as our most active months was pushed back while the adjustment cycle ran its course. Keep in mind the Beige Book offers anecdotal snapshots of economic and financial activity nationwide; not precise figures. Fed Beige Book Highlights for the 2nd District -- New York:

The Second District's economy has shown scattered signs of a pickup since the last report. The labor market has given mixed signals, with some signs of strengthening in manufacturing, but ongoing weakness in hiring in other sectors. Manufacturing sector contacts report increased activity and remain optimistic about the near-term outlook. Auto dealers indicate that sales declined sharply in September, as expected, reflecting the end of the cash-for-clunkers program, as well as depleted inventories. However, general merchandise retailers report that sales improved in September and were ahead of plan and roughly on par with a year earlier. Consumer confidence, though still low, has moved up moderately since the last report. Tourism activity in New York City has been sluggish but relatively steady, with leisure visitors partly offsetting an ongoing pronounced slump in business travel. Commercial real estate markets--in both the office and industrial categories--have been steady to moderately weaker since the last report. Residential real estate markets have been mixed since the last report, but generally weaker, especially at the high end of the market. Home sales activity reportedly rebounded a bit from depressed second quarter levels, but prices, as well as rents, have continued to decline. Finally, bankers report rising delinquency rates--particularly on consumer and commercial mortgage loans--along with ongoing tightening in credit standards; loan demand continued to decline, except for residential mortgages, where bankers report some pickup in demand. Construction and Real Estate Commercial real estate markets in the District were steady to softer since the last report. Manhattan's office vacancy rate continued to climb in September and for the third quarter overall, while asking rents continued to drop and were again down about 20 percent from a year earlier (not counting increased concessions by landlords). In the rest of the New York City metropolitan region, however, office markets have slackened only marginally. Industrial vacancy rates are up slightly in northern New Jersey, Long Island and Westchester, while asking rents have fallen moderately in all these areas except Westchester, where they have held steady. Housing markets remain sluggish across the District, though sales activity has picked up in certain areas. A New Jersey contact indicates that resale activity is inching upward, though prices continue to be depressed due to a substantial volume of foreclosures and short sales. New home sales remain flat in northern New Jersey, though the inventory is gradually diminishing, due to a lack of new development. In western New York State, home sales activity reportedly slowed in August and remained relatively sluggish in September, while prices generally remained steady; contacts express concern that the upcoming expiration of the $8,000 tax credit for first-time homebuyers will adversely affect sales and prices. Manhattan's apartment sales market remained weak in the third quarter. Sales activity rebounded moderately from the prior quarter but remained lower than a year earlier; prices continued to decline and were estimated to be down 18 percent from a year earlier on a per-square-foot basis. The inventory of listings declined modestly, but the average number of days on the market continued to climb. Manhattan's rental market slackened further in September, with average asking rents continuing to run about 10 percent below a year earlier; in addition, landlords are reported to be offering increasingly generous concessions--waiving fees and offering one or more months of free rent. Vacancy rates are reported to have edged down seasonally, but this is expected to reverse in the upcoming (typically slower) winter season.

As I discussed with the Q3 report, yes, sales were down from the year ago period but only slightly. I think there is a good chance sales will meet or beat the year ago period for Q4 when its released, and a very good chance we will beat Q1 + Q2 sales activity from 2009 when those reports come out next year! Its easy to beat the reports that ultimately defined the downturn with sales volume plunging! We still have pipeline action to come through from the surge in action over the past 4-6 months. To me, the market still seems active for this time of year although deals continue to take place at the stronger end of the trading zone reached after the correction played out.

Residential Construction Expected to Plummet 81%

2009-10-21T14:40:53Z

A: The numbers just do not make sense to start new projects, especially with the recent changes in the abatement grants from the city. This is a healthy consequence after a boom and is part of the purging of excess process. Over time, the markets will heal themselves and the numbers will start to make sense again. Don't mis-interpret the headline to think the cleansing process didn't start yet - it did! This is evidence of it and a good sign. Crain's reports that, "NYC construction spending to drop 20% this year":

Led by a sharp decline in private-sector building, overall construction spending is expected to plunge 20% this year to $25.8 billion, according to a study released Wednesday by the New York Building Congress. The recession has strangled demand for new residential buildings while the credit crunch has severed traditional lines of financing. The number of residential units constructed this year is expected to plummet 81% to just 6,300 units, while the amount spent is projected to sink 44% to $3.5 billion. Meanwhile, spending on non-residential private construction, which includes buildings such as office towers and institutional projects such as museums, is predicted to slump 38% to $6.9 billion. It is expected to tumble further in the next two years.

With rents down, unemployment still on the rise, and prices in the process of finding a comfort zone to trade in, new construction plans are falling. Add in that financing for major projects is not anywhere as easy and cheap as it used to be, and the numbers just don't work. This is prudent decision making in a recessionary environment. Banks are hesitant to lend and developers are hesitant to build. In regards to the 421-A and other tax abatement/exemption programs, the city utilized such tools to incentivize developers to build vacant or underutilized lots across the city. It became a subsidy to the developers of luxury new developments. In the boom years, especially in 2006 & 2007, the abatement became the focal point of justifying ever increasing asking prices. All of a sudden, paying $1,500, $1,700, or $2,000/sft was not only OK but buyers rationalized that it made sense with the lower carrying costs. It got so dangerous that I publicly warned would be buyers out there of the potential pitfalls back in June of 2006 - "Don't Be Fooled: 421A Tax Exemption" and again in a NY Post article in April 2007 (man, did I get shit for that from the brokerage community):

Don't get me wrong, new developments are a great product and perfect for those who can afford them. But for those seeking an investment play, its hard to rationalize the price per square foot + higher closing costs on some of these developments considering they will get more expensive to carry every two years for the next 10 or 15 years. The monthly expenses (maintenance + real estate taxes) of a particular property are directly correlated with the affordability of the apartment at re-sale. Therefore, a property with higher monthly expenses must lower their ultimate asking price to compensate for affordability or else it will never sell. On the flip side, a property with very low monthly expenses can get away with a higher asking price on the open market.

When the price is right, the abatement is a wonderful bonus for the new owner. Its when the price gets out of whack and the abatement used to justify the higher price, that I called into question. While the temporarily low monthly expenses were used to justify the surging price per square foot during the boom years, over time the cost to carry the unit would systematically increase. The 421-A is a 10 year abatement where every two years 20% of the untaxed portion becomes taxed. There are 5 adjustments until mature taxes are implemented. When the market was in the euphoria stage in 2006 and 2007, buyers were too focused on the ever increasing prices and willing to ignore this risk to get on board the asset boom. The thinking was the party would never end. Nothing you can do about it now. It is what it is. Sure, the new development should trade at a premium and the lower costs to carry should warrant a slight effect on the transaction price. But in the height of the boom, this was taken to the extreme and the markets, as they always do, ultimately corrected itself. What began as a program to stave off the tough times in the 70s and the need for more affordable housing in the 80s, became a tool for developers to make record breaking transactions. There is no shortage of luxury condos in Manhattan today, that is for sure. Maybe a shortage of affordable luxury condos, but that is a different story.

Credit Suisse Pay Plan Altered

2009-10-20T19:56:35Z

A: Good thing we covered this topic yesterday! People hear numbers like $140Bln and they immediately think of all the cold, hard cash that will pour into our markets - so bid up. What gets overlooked is the structure of these handouts and the fact that the cash portion is likely to shrink and be deferred. How does this affect the existing homeowner that is counting on a huge cash bonus to settle rising debts or continue to fund their lifestyle? There are two sides to the bonus coin: the affect on buyers and the affect on sellers. According to the NY Times Dealbook, "Credit Suisse Alters Pay Plan for Top Executives":

Under the new plan, top executives will receive a proportionately higher base salary in cash. But the bonuses they receive on top of this will be deferred for a longer period and tied more closely to the bank’s performance and the performance of employees’ individual business units. The bonuses will be split evenly between deferred stock and deferred cash. The stock portion of the bonuses will vest after four years — a year longer than has been the practice at Credit Suisse in the past — and will be adjusted according to the average share price and return on equity. The cash aspect of the bonuses, which Credit Suisse says is new, will be deferred for three years and will be based on return on equity and the performance of business units. The compensation changes cover salaries and bonuses for the firm’s 7,200 managing directors and directors worldwide. They take effect in January and apply to pay for 2009.

More details at the Credit Suisse website showing the press release. In yesterday's piece, "Euphoria or Reality Over Upcoming Bonuses?", I wondered...:

"What I don't hear are terms like: distribution of cash component vs stock options, deferred stock compensation, clawbacks, ROE shares deferred, toxic asset bonus fund (credit suisse in 2008), other government tax policy on future bonuses, etc.."

Exactly. Reality. Lets keep it real!

Knakal: Resurgence of Institutional Capital

2009-10-20T18:52:28Z

A: I need to plug Robert Knakal's Streetwise blog because the content has been a breath of fresh air for the past nine months or so. In his latest piece, he discusses the "resurgence" of institutional capital interested in buying distressed Manhattan property, to which their is limited supply (office, multi-family, mixed-use, etc..). With transactional volume down "60% from 2008 and 75% from 2007", average property values fell about 32% from peak levels. Sounds about right with office properties seeing the most pressure. But with sales volume down so sharply, why the limited supply? There are three main pressures on commercial properties: a) rising unemployment b) declining rents c) tight financing in the mid to high end Strange to see inventory levels so tight given the plunge in sales volume. To hear Knakal describe it, "...discretionary sellers are seeing these pricing trends as a tangible reason not to place properties on the market at the present time". According to "Low Volume of Investment Sales Caused by Supply Constraint; Demand Still Strong":

The volume of investment sales recently has been extraordinarily weak whether you look at aggregate sales price or number of transactions. In fact, we are on pace to see sales volume hit the lowest level we have seen in the 26 years we have been tracking these statistics. Average property value has fallen in New York by 32% from its peak levels. Multi-family properties have been performing best, having lost only 16% of value while office buildings with significant exposure to the marketplace have been the most negatively affected, seeing a reduction in value of about 70%. These reduced values have peaked the interest from the buying community as investors are looking for core assets at greatly reduced prices. Conversely, discretionary sellers are seeing these pricing trends as a tangible reason not to place properties on the market at the present time. At the height of the market in the first half of 2007, we had, at one point, 836 exclusive listings. Today, we have just 513 and have been below 600 for the entire year. We remain hopeful that the supply side of the equation will get better as distressed assets appear to be coming to the market in slightly better numbers than we have seen thus far in the cycle.

Mr. Knakal goes on to discuss..."on the demand side, we have seen resurgence, within the past month or two, of institutional capital. As I mentioned earlier, this capital all but evaporated from the marketplace in the summer of 2007 and many of these institutional real estate players have formed distressed asset funds looking to buy properties. These funds are now in the market actively bidding on opportunities." I too know of a few funds that were recently set up to take advantage of distress opportunities in that sector. Leads me to believe that a disconnect may exist in the most distressed commercial sectors as bids, while out there, just are not at levels that non pressured sellers would consider trading at - but then again, what the heck is non pressured sellers anyway. How do we quantify who needs to raise cash fast and close within a few months or else default? And how do you add in to that the human reaction to dealing with a financially stressed situation? Maybe a seller is in denial and ignores what in hindsight turns out to be a solid bid? With declining rents, rising unemployment, and a tight financing market, the price has to be right; as the new owner will ultimately have a much better environment with which to operate the property. This is a highly deflationary phenomenon and tends to have a ripple effect on competing properties. This also may be one reason why bids have improved in the sense that Armageddon is now off the table, but not to a level that would jive with the current reflation trade mentality. The numbers still have to work! For now, it's likely a good time to get into some distressed properties in office and mixed use marketplace if you have the cash and the numbers work! The chances of a natural overshoot to downside are high with such a fierce move; especially in office markets. For residential, the fear trades window was about 2-3 months (Feb, March, into early April) before the market saw a re-emergence of buyers and bids started to price out systemic risk. We found out later which months ultimately saw the sharpest deals. Last check saw Manhattan office vacancy rates at 11.1%, a five year high, with rents falling 5.2% from the 2nd quarter and down 22% from the year ago period; via Bloomberg. Calculated Risk adds some thoughts from NY Fed President William Dudley:

"First, the capitalization rate—the ratio of income to valuation—has climbed sharply. At the peak, capitalization rates for prime properties were in the range of 5 percent. That means that investors were willing to pay $20 for a $1 of income. Today, the capitalization rate appears to have risen to about 8 percent. That means that the same dollar of income is now capitalized as worth only $12.50. In other words, if income were stable, the value of the properties would have fallen by 37.5 percent. Second, the income generated by commercial real estate has generally been falling."

Not sure where cap rates are today, as my business is entirely focused on the residential sector. But it is clear that we are experiencing a deflationary adjustment, no matter what reflation trade seems to be going on in more liquid markets. Its healthy, it has to happen, it is happening, and markets will continue to purge the excesses from a credit fueled housing boom. Net effective rents are more clearly showing the furious adjustment; these are rents after deductions and landlord concessions are factored in. Crain's reports net effective rents for commercial sector "hit levels that are 45% below their pre-recession peaks". While I just renewed my residential lease 2 weeks ago, I'll share the outcome:

I rent a 891 sft, JR4, with 1 bathroom in full service upper east side building. E 80s location, west of 3rd avenue. My starting rent in 2006 was $2,900. It was raised to $3,100 in 2007 and raised again to $3,300 in 2008 (they asked for $3,450, but only offered $3,300) as there was no inventory in building even though markets seemed to be trending down this time last year already. Landlord offered me $3,150 + 1 month free rent for a 13 month lease renewal. I asked for $2,900 plus the same concession. They came to $3,000/mth + 1 month free on a 13 month lease. I took it. So, that brings the net effective rent to about $2,750/month, or a 17% reduction from last year's levels.

Anyone out there care to share what they are seeing in the commercial or rental leasing markets?